Second Mortgage Foreclosure

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mortgage 4
HIGHLIGHTS
  • Understand that your second mortgage holder can foreclose on your home for non-payment.
  • Review why it is possible legally, although not practical economically, for a second mortgage hodler to foreclose.
  • Consider the possible tax implications, if any debt you have is forgiven.

It is possible legally, although not practical economically, for a second mortgagee to foreclose.

If you have a second mortgage which you are not able to pay, you can face foreclosure, whether or not you are paying your first mortgage in full and on time. While your second mortgage holder is in a weaker position, when it comes to collecting from the proceeds of a foreclosure sale, it does not mean that your second mortgage lender will accept non-payment without taking action. Just as with your first mortgage, you need to be concerned with the issues of recourse and non-recourse loans and a deficiency balance, when it comes to considering what kind of obligations you may have after a foreclosure.

The likelihood that your second mortgage holder will initiate a foreclosure depends on your property values and your lender’s ability to collect on a deficiency balance.

Property Values

Given today’s real estate market, where property values have dropped significantly in many areas, many homeowners are upside-down on their mortgages. If you are in a negative equity position, it may be possible legally, although not practical economically, for your second mortgage holder to foreclose and preserve its interests in the property. The first mortgage holder receives any money from a foreclosure before the second mortgage holder. If there is not enough equity in the home to pay off the first mortgage, the second mortgage holder gets nothing in the foreclosure sale.

When a second mortgage holder initiates the foreclosure process, it is responsible for paying off the first mortgage holder’s balance due. If the sale price of the property would not be enough to pay off the first mortgage balance and any property taxes, then the second mortgage holder would gain no economic benefit from foreclosing.

Deficiency Balance Collectibility

The ability of the second mortgage holder to collect on a deficiency balance depends on the legal remedies available and your financial position. In some states, such as California, and in some circumstances, your second mortgage may be a non-recourse loan. A non-recourse loan means that the lender has no legal ability to collect any deficiency balance that remains after your property is sold. Its only recourse is the security on the property itself. Most second loans are recourse loans, even in non-recourse states, although it may be a non-recourse loan if you took out the second mortgage and used the funds to purchase your home. If your loan is a non-recourse loan, the second mortgage holder will have no ability to collect on deficiency balance, which reduces the likelihood of the second mortgage holder foreclosing. You will need to review your loan documents and state laws to determine if your second mortgage is a non-recourse loan. Contact an attorney in your state who is experienced in property law to determine if your second mortgage is a recourse or non-recourse loan.

Your financial position is also important. As we discussed, a second mortgage holder is often reluctant to pursue foreclosure. However, if you have valuable assets or wages that can be garnished, your second mortgage holder will be likelier to aggressively pursue you, if it has the legal ability to do so. The more collectible the deficiency balance is, the greater the chance that your second mortgage holder will foreclose on you.

Quick Tip: Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Possible Payment Solutions

Second mortgage holders often initially take a hard-line stance in negotiations with homeowners in default. You may find it best to liquidate an asset voluntarily, as opposed to facing a wage levy that could cause you great financial havoc.

However, if the lender is convinced that you have no ability to repay the second mortgage and are considering bankruptcy, the lender’s position will soften and consider a lump-sum settlement. Some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.

If collection efforts ensue, negotiate with the creditor in an attempt to reach an out-of-court settlement on the debt. If necessary, enroll the debt in a debt negotiation program. You can to the Bills.com debt relief savings center for a no-cost quote. Another option is to negotiate the debt yourself.

Quick Tip: Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

Summary

If you end up with a deficiency balance, make sure that you understand what kind of financial and tax responsibilities can follow you, even after you lose or sell your home. If your lender decides to write off the debt, that can create a tax debt for you. Speak with an attorney or a tax specialist, so an expert can explain things to you. The last thing you want is for a problem that you thought was behind you to rear its head with IRS collection notices or a wage levy from a judgment your creditor obtained.

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Comments (87)


Bryan J.
Los Angeles, CA  |  February 06, 2014
Have a 2nd property, I/O Mortgage, in NV. I'm a CA resident. Anticipating not being able to afford payments after the 10 yr mark, when loan adjusts and i'm no longer able to pay interest only. Ten years in, and no equity in property because it's severely worth less than purchase amt. Don't think Refi/Mod are plausible options. Don't want to declare BK, still have a job and a first on a property in CA, where my residence is. Best viable options?
Bills.com
February 10, 2014
Start looking into a short sale or deed in lieu of foreclosure to rid yourself of your underwater property. Open a discussion with the mortgage servicer now about these two options. Also, look for a Nevada lawyer who has mortgage experience to help you with this process.
Kim M.
San Diego, CA  |  February 05, 2014
Out of good deed, I cosign a friend for her to be able to get a house back in 2006. Few months after they refinance the house but I'm not sure if my name was taken out of the previous loan. After a year, I heard she had the house foreclosed. I went online and obtain my current credit history report and it shows that I have two mortgage loans. The first mortgage cleared my name and a 2nd loan is reflecting on the credit report which is greatly affecting my credit score. I know my mistake of cosigning someone and I've learned it in hard way. So, how can I deal with this and get it out of my credit report? I know that its over 7 years and I can ask the credit bureau to take it off my record. it's been almost 8 years and I'm worried if the 2nd loan will pursue me or not. What are my options?
Bills.com
February 05, 2014
It sounds like you signed for two loans to help your friend buy the home. What you need to do is to find out the SOL for mortgage debt in the state where the home is situated. If the SOL has expired, don't pay a penny on the debt or make a promise to pay. I recommend that you check with a lawyer to find out the SOL for the mortgage debt.

Separately, dispute the entry on your credit report. Whether you owe the debt or not, the account should fall off of your report after 7 years from the date of default, barring a judgment being entered against you.
Lori D.
Ogden, IA  |  November 19, 2013
I purchased a home in 2006 with a first and second mortgage. Lost job and IndyMac bank foreclosed in 2009. I had not heard from any bank until yesterday when I received a letter from OCWEN saying they were collecting on my second mortgage and the amount they want is twice the second mortgage's balance. I received a 1099 for the second mortgage in 2009. I have once again lost my job and unemployed. What are my options?
Bills.com
December 02, 2013
Before you do anything else, send Ocwen a written debt validation notice. A debt that cannot be validated cannot be collected. On a related note, I would be very curious to learn if there is any legally defensible justification for the interest and other fees someone added to your second mortgage balance.

I assume the 1099 you mentioned is a 1099C, which is a notice to the IRS of a forgiven or canceled a debt of $600 or more. The 1099C notice, which the IRS calls a "Cancellation of Debt" notice, is perhaps the most misleadingly named document the IRS publishes. This notice does not remove a consumer's legal liability for the debt, or change the creditor's right to collect the debt on its own, or the creditor's right to sell the account to a collection agent. The 1099C notice requires the consumer to include the amount mentioned in the 1099C as income in their next income tax filing. See the Bills.com article Cancellation of Debt Income to learn how to handle a 1099C notice.

What are your options? As mentioned, send Ocwen a debt validation notice. Second, learn your state's statute of limitations for mortgage-related debt. Start with the Bills.com Statute of Limitations on Debt page. Note that you may need to conduct some research to learn which statute of limitations applied for this type of debt. Some states use a special mortgage-debt rule, others rely on the promissory note rule, and others will use the contracts rule.

Then, proceed accordingly. If Ocwen cannot validate the debt, then you will not hear from Ocwen again. If Ocwen validates the debt, then look to your state's statute of limitations rule for this type of debt. If the statute of limitations clock has run out on this debt, then send Ocwen a cease communications notice.

If the statute of limitations clock has not expired, then you risk nothing by putting your cards on the table and talking to one of its collection agents, explaining you have no assets and no income. In many cases like this, the collection agent will give up and pursue more lucrative targets for collections.

Ocwen may invite you to pay a small amount "in good faith." Think twice or three times before doing so, because making a payment resets the statute of limitations clock to zero. Resetting a statute of limitations clock would not be in your best interest.
Jon F.
Los Angeles, CA  |  October 13, 2013
I purchased a home in California back in 2006 with no down and an 80/20 loan. Come 2008, I stopped making mortgage payments and after a few months I left the house. Its been 5 yrs since I left my home and informed thru free credit report that my first loan was charged off thru foreclosure, but my second loan still shows up on my credit report that keeps pulling my score down. I am not quite sure if my loan is a non recourse type of loan, but I think it may be. I never refinanced or took any equity out the home. My question is, how can I get the second mortgage out of my credit report?
Bills.com
October 14, 2013
Under the Fair Credit Reporting Act (FCRA), the federal law that sets the rules consumer credit reporting agencies must follow, most derogatories can appear on your credit report for 7 years after the date of first delinquency. If your date of first delinquency was in, let's say May 2008 for the sake of argument, the derogatory account will be removed from your credit report in June 2015.
Michael C.
Arlington, TX  |  January 25, 2013
Went through a divorce here in Texas during 2012 and my wife was awarded our house. Second mortgage she decided she would not pay and let the home's first mortgage go into foreclosure on the property. She was paying the 2nd and quit, saying that I was to pay the second which was secured by the house... I was unable to as I was unemployed at the time. Horrible rates and loan $400 a month with $16k owed on a $20k loan taken out in 1997. Suggestions for my plight here in TX/!
Bills.com
January 25, 2013
I assume your ex-spouse's failure to stay current on the second concerns you because of the immediate impact on your credit report and score, and because as co-signer of the mortgages you have personal liability for the loan. I do not have good news for you. There is no "if we get divorced, the party occupying the home has 100% liability for the debt," clause in any mortgage loan I have read. A divorce has no impact on a joint loan, even if one party promises to assume the liability for the loan. There are four ways a joint borrower can end their liability for a loan:
  • Convince the other borrower to refinance the loan in occupier's name only.
  • Convince the lender to not take action against the non-occupying spouse. There is no reasonable situation where I would see a lender doing so, however.
  • File bankruptcy.
  • Die

You almost certainly have a cause of action (a legal reason to file a lawsuit) against your ex-spouse. If, for example, your spouse was wealthy and was not paying to spite you, you could ask a court to liquidate your ex-spouse's assets to pay the debt. That seems an unlikely set of circumstances here. Filing a lawsuit here would not be a wise course of action because it would not change the circumstances for either of you if you win.

What to do? You have limited options. Talk to a Texas lawyer who has experience in bankruptcy to learn more about the positives and negatives of this option.

JP S.
Santa Rosa, CA  |  November 30, 2012
Bought home in CA for 1 million. Now worth 650K. Want to WalkAway. Both first and second Morts were original purchase money loans, and have never been modified. Both should be Non-Recourse. One of the specifications of non-recourse is that the home was purchased as an owner-occupied first home, non-investment - which it always has been for us. The one caveat is that when we initially purchased, the builder (new home) asked for a 2-month rent-back, which we gave them, before moving in 2 months after purchase. Does this rent back give legal recourse for the Bank to contend that the Non-Recourse is invalid?
Bills.com
December 03, 2012
The key part of your question concerns the two month "rent-back" you mentioned. It is impossible to comment on how your situation fits with California's anti-deficiency law without knowing what's in the contract. Take your rental agreement and all of the documents you have regarding the home purchase to a California lawyer who has experience in real estate law. He or she will read the contract, and will give you an opinion how a California judge will view your liability for any deficiency balance.
James C.
Oak Park, CA  |  November 23, 2012
We lost our home to foreclosure in August of 2012. We were trying to short sell. However, the bank refused all offers. We moved to California with family since we lost our house in Las Vegas, Nevada. I just received a call from someone trying to collect on the second mortgage and also claimed if I do not pay they will garnish my wages. Is this possible? The house sold for less than what we owed and we are still trying to get on our feet. Can they garnish my wages or take what I have left, which isn't much?
Bills.com
November 25, 2012
You mentioned the foreclosure occurred in Nevada. Nevada has some protections for consumers with deficiency balances resulting from a foreclosure. One key protection is a limited amount of time to file an action (in other words, a lawsuit) against the borrower. Follow the link just mentioned to learn more. I also suggest you study NRS 40.455

Wage garnishment is the result of a legal process, which takes time. Follow the link just mentioned to to learn more.

Open a negotiation with who I assume is a collection agent. Second mortgage deficiency balance collections are a new field for collection agents. The good news, if you can call it that, is second mortgage collection accounts sell for about a penny on the dollar. The collection agent has the right to collect the full balance, but probably does not expect to do so. Offer the collection agent three or four cents on the dollar as a settlement.

Remember, under Nevada law, you have to worry about the deficiency balance for 6 months from the date of the foreclosure. After 6 months, the original creditor or a collection agent may not use the Nevada court system to collect the deficiency balance.
Maury M.
Winchester, MA  |  September 20, 2012
Had GMAC HEL on property, for $135K, and sold the property. Bought new property using HEL then paid off HEL, which is on record at registry of deeds, and shows discharge. But GMAC allowed me to use what I believe is HEL on previous property. Now owner of HEL is claiming they will foreclose. I went to the registry of deeds and they don't have any liens or mortgages on this property. I used the money but loan has sold twice; first to GMAC (what did that sell for, 5 cents on the dollar?); then sold last year again. What do I do offer them, $100 so i don't get a 1099? They are getting aggressive with calling family, showing up at my house, and so on. What to do?
Bills.com
September 20, 2012
It is difficult for me to understand the exact chain of events that gave rise to the collection agent's claim you owe it money for an unpaid home equity loan. Nevertheless, I infer you believe you have a moral or legal liability for the amount claimed. If so, negotiate a settlement for the amount due. As you suggested, collection agents buy collection accounts for pennies on the dollar, and starting negotiations there is a good place to begin.

You mentioned a 1099. Unless you are negotiating with the original lender, you need not worry about the collection agent issuing you a 1099-a or 1099-c.
Alisa D.
July 11, 2012
The jr. lender foreclosed on our home even though just had filed BK. Jr. then "demanded" us to dismiss BK and if we did so would allow us to "rent" the property. This is what we did. A year and a half later the first foreclosed. Doesn't the jr. have to make payments to first or payoff loan? Also, before jr. foreclosed they demanded that we make our double payments to them for their loan AND our payment for first to them. Is this legal? Have filed complaint with Independent Review and now jr. phones and asks what they can do to resolve. I need help asap...please.
Bills.com
July 11, 2012
There is much I do not understand about your message. Nevertheless, I will offer a few thoughts in response to your questions.
  • Once a debtor files a bankruptcy petition, all creditors are stayed from taking any action against the debtor. This includes foreclosure. The only way the junior could have foreclosed was with the bankruptcy court's permission. It had no right or standing to "demand" you ask the court to dismiss your bankruptcy filing. I confess I do not understand why your bankruptcy lawyer advised you to even give the junior the time of day, or why he or she did not raise the post-filing foreclosure issue with the court.
  • The senior home loan lender can buy-out the junior, or vice-versa.
  • The junior cannot demand you pay it what you may owe to another creditor, including the first. There is no legal or moral basis for this demand. However, as just mentioned, if the junior bought-out the senior, then it can demand payment for both loans because it owns the rights to do so.
  • I assume you filed a complaint with the Federal Reserve's Independent Foreclosure Review. The Independent Foreclosure Review determines whether homeowners who were involved in a foreclosure process between January 1, 2009 and December 31, 2010 suffered financial injury and should receive compensation or other remedy because of errors or other problems during their home foreclosure process. I will assume your foreclosure(s) occurred between those dates.

My advice? If you were wise and retained documents that prove the events you described above, I believe you have an excellent series of complaints against the junior. I do not have enough information to even venture a guess how much you were harmed by the junior's actions. Consult with a lawyer with a firm spine who will not bend to the whims of the junior's offers for settlement or outrageous demands. Find a lawyer in your state who has civil litigation experience who is willing to work on a contingency basis.

Barb S.
Bradley, IL  |  June 25, 2012
We had a second mortgage when our house was foreclosed on.The house was sold. Do we still have to pay the second loan?
Bills.com
June 25, 2012
Was the property in a state with an anti-deficiency law? If yes, then you may not need to repay any deficiency balance(s) on your home loan(s). Follow the link I just mentioned to learn the laws in the state where your property was situated.
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